Bear Stearns: 4 Things To Watch

By Heidi N. Moore

Bear Stearns has finally become a victim of the market rumors that the firm said were unfounded: in the past 24 hours, Bear Stearns’ liquidity has fallen so much — marking a failure of the firm’s ability to “parse fact from fiction,” that the investment bank had to seek help from J.P. Morgan and the Federal Reserve Bank of New York. J.P. Morgan is also helping Bear find sources of permanent financing “or other alternatives for the company.”

Here are four things to watch as the Bear Stearns crisis unfolds across TV screens and computer monitors:

Liquidity Position: A lot can change in three days, much less three months: Bear’s stock price was near $70 at the beginning of the week and is now near $35. Bear Stearns’ last public balance sheet was on November 30 — the end of its fiscal year — and the vacuum of information has left investors worried. (Bear announces earnings on March 20). As of November, Bear Stearns had a stronger balance sheet today than it did last year: Buckingham Research calculated that Bear has as much as $35.4 billion in short-term liquidity at the end of the year, which was more than 170% of its short-term unsecured borrowings. Now Bear is looking for money from the Fed.

Counterparty Risk: The WSJ previously reported that traders at Deutsche Bank were charging a higher fee to deal with Bear Stearns. A Buckingham Research note earlier this week speculated: “As best as we could determine, the rumor appeared to be intertwined with some disagreements over the value of collateral seized in the unwinding of Thornburg Mortgage and/or the hedge fund Peloton in London, to which BSC and 10+ other banks are lenders. Yet, based on our discussions with industry players, it seems that lenders are actually coming out relatively “whole” on their loans to these players given aggressive haircuts on collateral.”

Fed intervention: If there is any phrase guaranteed to worry people on Wall Street, it’s “Federal Reserve intervention.” And the New York Fed made a big exception for Bear. Although it is J.P. Morgan Chase lending the money, the Fed will be the one to take a loss if Bear Stearns fails. Usually the Fed can only lend directly to companies if it has the approval of five governors; in this case, the New York Fed made an end run around that requirement by showing that it had made the best efforts to assemble that many governors — and then giving Bear the loan anyway.

Stakeholders: Bear Stearns has already turned some deep pockets inside out. The firm has taken big investments from China’s CITIC as well as British billionaire Joe Lewis. Lewis spent around $860 million to buy 7% of Bear Stearns back when the stock was worth more than $100 a share, and he increased his stake in December when the stock was already around $11 lower. He currently holds around 11 million shares of Bear, according to filings, and now Bear’s shares are worth about one-third of what Lewis paid. CITIC has not yet closed its proposed investment in Bear, and today’s moves suggest that will be more difficult. Bear’s largest shareholder is Wilmington Trust FSB, with 27.3 million shares. Former chief executive Jimmy Cayne is the fourth-largest shareholder, with 5.8 million shares.

Subprime Losers:
# UBS AG (UBS) shut down one of its hedge funds in 2007 after it incurred $123 million in subprime-related losses, putting a damper on the firm's profits. UBS reported a $4.4 billion loss on fixed-income securities for the third quarter 2007. UBS currently has exposure to $16.8 billion in subprime mortgage backed securities and $1.8 billion in collateralized debt obligations. [12]

# Bear Stearns Companies (BSC) had a significant investment in the subprime mortgage boom. So far, Bear has lost around $3.4 billion on subprime investments, mostly in two of its hedge funds. The subsequent 30% drop in its market value prompted speculation about potential takeovers.

Speaking of options, did you hear that there were 55,000 put options contracts purchased last Tuesday on Bear Stearns with a strike price of $30? At the time the stocks was trading at $65. That was a huge bet that the stock was going to go down. It closed on Friday at $30. Each contract was purchased between 15 to 50 cents on Tuesday and right now they are trading near $6.00 a contract. Nice trade, huh? It makes you wonder how we think we can play this game when there's things like that going on.

9:28 am March 17, 2008

dytter wrote :

Wasn't the abuse of margin trading a major cause of the '29 collapse? I hope you Wall Street brainiacs lose your shirts. It will be nice to not have to hear about the enormous amounts of money you jerks have sucked out of the economy over the years to line your pockets. "Investment Adviser" is another way to spell thief.

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